the right comps

I had a real estate agent ask a fantastic question recently about choosing comps when there is a gated neighborhood. Here’s the issue: If the subject property is NOT located in a gated community, can an appraiser use “comps” that are similar and within 0.25 miles but are in a gated community? My answer is YES and NO.

YES: An appraiser can definitely use sales from a gated community. If there isn’t a price difference inside and outside the gate, an appraiser can use gated sales and make no value adjustment. Or if there is a price difference between the two locations, an appraiser can always choose to use gated “comps”, but also make an up or down adjustment to account for the value difference.

NO: Sound the alarm because it’s a red flag if you are valuing something outside a gate but only using gated “comps”. After all, what is the gate keeping in? And what is it keeping out? Despite being nearby, a gated subdivision could be a much different market that is higher or lower in price. Realistically, if I am only using gated sales for my “comps”, I haven’t really shown what the market is willing to pay outside the gate. There could be a value difference, which is why it’s critical to find non-gated sales to help tell the story of value for the subject property (even if the sales are older). It goes back to an “apples to apples’ comparison where we want to try to use the most similar sales in terms of size, location, condition, quality, bed/bath count, etc… Ultimately as we study the market we can make the distinction between properties that are truly “comps” from ones that are merely sales.

A local example: Here is a graph of all 2500 to 3500 sq ft sales in the Crocker Ranch area of Roseville. The blue dots are the gated sales and the yellow dots are the non-gated sales.

The graph helps show larger-sized properties inside the gated areas tend to command higher prices. Obviously there are some higher non-gated sales too, but the highest sales in the area over the past 7 years have come from within the gate. This is why we have to study sales and then choose “comps” accordingly.

Questions: Do you find values to be higher or lower outside of a gated community? Any other advice or wisdom you’d offer when it comes to choosing comps? Did I miss anything?

We all know most buyers are going to pay less for a home on a busy street. But how much less? Is it really only something minimal like $5,000 or $10,000, or is it much more substantial? Knowing how to come up with adjustments is critical for anyone working in real estate, so let’s walk through a two-step example below to shed some light on how appraisers might approach a busy location.

The Temptation: It’s easy to use the same adjustments in every neighborhood and in every market, but there is no one-size-fits-all adjustment that will work in every case. This is why we need to know how to research the market.

Here are a couple key points and steps:

1) The best comps don’t need adjustments:

The first thing we want to do is look for sales and listings on the same street. When we have similar sales with roughly the same location, these properties tell us exactly what the market is willing to pay. There is no guessing and no need to use many other sales because we essentially have the best examples of properties that have already been vetted by the market. If we pull sales or listings from a superior street, it’s easy to minimize the adverse location. But if all the sales on the busy street are coming in substantially lower than surrounding sales, the market has spoken. If you don’t have recent sales, you can look at much older sales on the same street, and study other nearby sales at the time to see how much of a value impact there was. If there are zero sales on the subject street, find a competitive busy street in the market area (or maybe even a commercial location or something quasi-similar). There has to be something out there. Also be sure to look at actives, pendings, expired listings and withdrawn listings since they can sometimes give clues on value.

2) Comparing busy vs. not busy:

This is where we take a good look at any potential price difference between sales and listings on busy and not busy streets. We have to make sure we are comparing “apples to apples” so to speak, so pay close attention to size, condition, upgrades, lot size, layout, garage space, etc… The goal is to match up several sales instead of just one example because this helps us have a better context of support. In truth we might end up coming up with a range of value for what we think the adjustment should be too. That’s okay. Just ask yourself where your property realistically fits on the range of value spectrum.

The Verdict: There haven’t been many recent sales in the immediate area lately, which makes it a more involved process to establish value. But even with these older sales, the value difference is fairly large, right? When looking at sales on Freeport Blvd vs competitive sales on typical streets, it looks like the value range is easily anywhere from 25-50K+. If we spent more time on this, we could hone in on a tighter range, but you get the point, right?

NOTE: I am not saying this is the adjustment to give. This is simply a quick snapshot of the market right now for the sake of illustrating a methodology. Remember that these properties on Freeport Blvd also back to public transportation too.

I hope this was helpful. I’d love to hear your take in the comments below.

Questions: Any further insight or stories to share? How have you seen an adverse location impact the value of a property?

I get quite a few calls from the real estate community about pricing attached units. The conversation tends to go like this:

Agent: Ryan, I’m working on pricing a halfplex, and it’s not easy.Me: I feel your pain.Agent: There aren’t any recent halfplex sales in the neighborhood, and my unit is larger than others too. What should I do?Me: You should probably just guess and hope you’re okay on value.Agent: What??Me: I’m kidding. Let’s talk about it.

What is a halfplex? If you are located in another part of the country, you might call an attached home something else, but in the Sacramento area we say “halfplex” (sort of like half a duplex). The home below is a halfplex because it is connected to the house next door by the garage and a wall inside. Moreover, the parcel line runs through the center of the connecting wall in the garage, so each unit is individually owned and has its own lot.

It’s not always easy to value certain properties – especially when sales are sparse. This is why it’s important to have a solid valuation methodology clipped to your real estate utility belt so you can apply it as needed.

Tips for Valuing a Halfplex (Attached Home):

1) Apples to Apples: An attached home should be compared to other attached homes because a buyer looking for a detached unit is usually NOT simultaneously in the market for an attached one. It’s just a different type of house. Moreover, there can be a huge value difference between attached vs. detached.

2) Start in the Immediate Neighborhood: You’ll want to find halfplex (attached) sales in the immediate neighborhood so you are sure what buyers have been willing to pay in the area. If you go out too far looking for “comps”, it’s easy to miss the immediate market by assuming that values are similar in other tracts. I recommend using the Polygon tool in Sacramento MLS so you can actually draw exact neighborhood boundaries in the immediate subdivision to be sure you are only getting data from those boundaries. You might want to start looking at sales over the past 6 months and then go back to one year. In an ideal world you will have a ton of sales, but we all know that doesn’t always happen.

TIP: In addition to sales, be sure to look at both listings and withdrawn listings in the immediate neighborhood to get a fuller picture of neighborhood values.

3) Look at Older Sales in Immediate Neighborhood: Be sure to look back over the past few years or so in the immediate neighborhood so you can see gain a better context for the halfplex market. You probably won’t use these oldies as comps in a listing presentation (or appraisal), but they still might provide a fantastic context because you can either add or subtract value to older sales based on what the market has done over time.

4) Previous Subject Property Sale: Has the subject property sold previously? If so, look up sales at the time to see what it was comparable to in the neighborhood? Moreover, how has the market changed since it sold previously? Be sure to give more value weight to recent sales and current reasonable listings, but be aware of any previous sale to help create context. Remember the condition of the subject property might have changed over time, and pay attention to the nature of the previous sale (maybe it sold for too little or too much).

5) Competitive Sales in Other Tracts: In some areas of town there are simply few attached homes, so you may need to go out several miles to find comps. The problem of course is that if you travel too far, some neighborhoods might have higher or lower prices, so be aware of value adjustments that might need to be made. As a rule of thumb, try to look in areas where you think a buyer might realistically considering hunting for a home if the subject property was not available. You can double check how comparable other neighborhoods are by comparing older sales in the immediate neighborhood with older sales in neighborhoods that are further away. For instance, if you have an older sale that closed at $250,000 in the immediate neighborhood, how much did similar-sized halfplex sales in further places sell for at the time? If the neighborhood that is further away ends up being very similar in price when comparing historical sales, there is a good chance current sales in the further neighborhood could help tell you what the current market is willing to pay for your neighborhood. Be careful to not just look at one sale though because one sale does not make or break the market. Having a few data points is best so you know you’re not just looking at an outlier.

6) Detached Units in Immediate Neighborhood: Be aware of what other detached units are selling for in the neighborhood. If there are very few recent sales, I recommend going back in time to find out what the price difference was between halfplex (attached) sales and similar-sized detached sales in the immediate neighborhood. Then once you understand the price difference in the past neighborhood market, come back to today’s market. What are similar-sized detached sales currently selling for? This may help you see what attached units should theoretically be selling for. Remember, this is definitely a back-burner approach to value, and it’s not the first step, but it can still provide context.

7) Bottom of the Market: Where is the bottom of the market in the immediate neighborhood? There is a good chance that halfplex (attached) units tend to sell toward the bottom of the price range compared to similar-sized detached units. I’m not saying all halfplex units are going to sell for dirt cheap, but only that they tend to be marketed toward the lower end of the price ladder in many neighborhoods.

Have you heard of Fannie Mae’s Collateral Underwriter yet? It’s coming in a matter of days on January 26, and it’s been called an “appraisal time bomb” by some, while others say it’s no biggie. Today I want to give you the scoop on what it is as well as some of the potential impact it might have.

CU performs an automated risk assessment on appraisals geared toward Fannie Mae and returns a risk score, flags, and messages to the submitting lender. CU will provide a risk score for the appraisal of 1-5 (1 being the lowest risk and 5 being the highest).

CU will analyze comparable sales selected by the appraiser and recommend alternatives.

CU will compare adjustments the appraiser has given with what other appraisers have done in the same area (Fannie Mae has been mining data from over 12 million appraisals since 2011, so they definitely have some data at their disposal).

CU will review specific information in each appraisal such as the sales price, lot size, bathroom count, bedroom count, age, location, size of the basement, condition, quality of construction, view, and GLA (gross living area). In 2011 Fannie Mae mandated appraisers to begin using UAD codes in their reports to describe all of these elements. You may have read a report and thought, “Why the heck is the appraiser saying the property is in ‘C4’ condition? What does that even mean?” Well, that is a Fannie Mae UAD code to describe a specific condition, and now that Fannie Maw has over 12 million appraisals in their system with these codes, it has allowed Fannie Mae to give birth to the CU review tool.

5 things to know about Fannie Mae’s Collateral Underwriter:

Fannie loans only: CU is only used for loans geared toward Fannie Mae, and not for divorce appraisals or any other private appraisals. CU is also not used on 2-4 unit properties or “drive-by” appraisals.

Not FHA/VA: CU is not used for FHA and VA loans (I’d be shocked if they didn’t adopt it later though).

Commentary: The CU tool does not read any of the commentary by the appraiser, which can be key to understanding comp selection, adjustments, and the final value.

Neighborhood boundaries: CU uses census block groups for data analysis instead of specific neighborhood boundaries that may be readily understood in the market. Pulling data from the right neighborhood can make a HUGE difference in a valuation, don’t you think?

Adjustments & comps: Fannie Mae has heaps of data to compare to any new appraisals that come into the system. Not only do they know about sales in the neighborhood, but they also know which comps other appraisers have used, and even value adjustments given by other appraisers. CU knows if an appraiser says a comp is in good condition (C3) in one report, but then says it is in fair condition (C5) in a different report. CU will pay special attention to comp selection, adjustments, and the final reconciliation of value.

Potential Impact of Fannie Mae’s Collateral Underwriter:

Unknown: The truth is we don’t really know how CU will impact the market. It could be a game-changer for the mortgage industry and appraisal profession, or it could feel like the same old same old.

Slower loan process: As CU is implemented, expect a learning curve, and thereby a slower loan processing time. It’s going to take some time for lenders, appraisers, and underwriters to work out the bugs.

More conservative appraisals: One of the unintended consequences of CU may be more conservative appraisals.

Headaches for appraisers: The fear among appraisers is that lender clients will now come back to say, “CU has identified 20 other comps in this census block. Why did the you not use these?” Hopefully that will not happen (assuming the appraiser did a good job of course), but increased scrutiny will be bound to cause appraisers to spend more time responding to CU.

Higher cost for consumers: If CU does end up putting more work on appraisers, it may lead to higher appraisal fees. After all, more work requires more time (which is money).

Advice to the Real Estate Community:

Real Estate Agents: Make sure your clients know how strict the underwriting process has become for appraisals. I’m not saying you need to sit down with your clients and watch Fannie Mae’s CU tutorial (that’s probably a quick way to lose clients). All I’m saying is this is one more reason to price properties correctly since the appraisal is going to be even more scrutinized now. Also, if you accept an offer that is clearly out sync with neighborhood values, the lender is going to have a ton of data at their disposal about neighborhood values – even if the appraiser happens to “hit the number” somehow.

Appraisers: Many appraisers are gravely concerned about CU, though many lenders have been reaching out to say, “Hey, we’ve already been scrutinizing you, so don’t worry about this.” Only time will tell how this will impact business and the industry. All we can do is choose the best available comparables and make reasonable market-supported adjustments. There will be a learning curve to know how to avoid red flags so to speak, but explaining why we made adjustments and supporting those adjustments will be a big theme this year for lender work. The bottom line is appraisers will need to add more commentary in their reports. If you are making the same adjustments in every single report regardless of the location of the property, it’s time to stop that because adjustments vary depending on the neighborhood. If you are struggling to support adjustments, it may be a good year to find a mentor as well as take some quality continuing education. If you do not know how to graph sales, make that a top goal this year. On the other hand, if you are an experienced appraiser, find ways to be a mentor to other appraisers by answering their questions – whether on forums or in person. As I said in 10 things appraisers can do to improve the appraisal industry, “Too many appraisers think they are right about everything, but at the end of the day being right doesn’t help anyone grow. Find ways to share your knowledge and build others up.” Lastly, if it ends up costing you more time to do your work, it may be time to consider raising your rates.

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